Almost three-quarters of UK defined benefit
pension schemes could be adopting a cashflow driven investment strategy within
12 months, a survey of trustees and consultants overseeing more than £1
trillion of assets has found.

The research, commissioned by AXA Investment
Managers and carried out by mallowstreet, found that 52% of schemes are already
adopting a cashflow strategy, with a further 21% considering doing so in the
next 12 months.

The survey, which polled 48 pension funds
(ranging in size from £2bn+ to under £500m) and 10 investment consultants in
March 2019, comes as cashflow negativity rises up the agenda for trustees as
schemes mature. It is estimated that more than 85%[1]
of schemes will be cashflow negative by 2028, prompting trustees to consider
investment strategies to help them ensure they have the appropriate cashflows
to meet their member promises.

Sebastien
Proffit, Head of Portfolio Solutions, Fixed Income at AXA IM, said:

“Cashflow negativity, in conjunction with
decreasing liquidity in credit markets, rising transaction costs and regulatory
changes, means schemes face an increasingly difficult challenge to ensure they
can meet all of their pension liabilities efficiently. It’s therefore vital
that they are putting strategies in place to have the best chance of meeting
all of these payments in the future, so it is encouraging to see that the
majority of schemes are thinking about the importance of cashflow driven
investment (CDI).

“However, it is important to remember that
cashflow matching is far more complex than simply buying credit. In order to
avoid becoming a forced seller of assets, schemes need to implement robust,
long-term strategies that can incorporate a wider mix of assets underpinned by
quality risk analysis, including – crucially – ESG criteria.”

Endgame
strategies

As part of the survey, AXA IM also
questioned schemes on their broader endgame strategies. The research found that
52% of schemes were targeting self-sufficiency, 25% were aiming for buy-out,
and that none of the pension schemes surveyed (0%) defined buy-in as their
endgame objective[2].

Results varied slightly between different
sizes of schemes, with self-sufficiency favoured by 57% of the largest schemes
compared to 42% of small schemes. Within the survey, buy-out was only favoured
by 10% of schemes with more than £2bn of assets.

John
Stainsby, Head of Client Group UK at AXA IM, said:

“It was perhaps surprising to see that
buy-in was not a prevalent choice for small or large schemes, but the research
clearly shows two obvious trends. One is that larger numbers of schemes are
aiming for self-sufficiency as part of their endgame planning. The other is
that schemes more broadly are looking at strategies to ensure they are
generating predictable cashflows so they can meet their member promises
efficiently and as they fall due.

“As pension funds mature, it is imperative
that they focus on and define their endgame strategies. If a scheme has a
self-sufficiency objective, as our research shows large numbers do, then
ensuring that the cashflows are there when expected is vital. CDI can provide
schemes of all sizes with the certainty they need to deliver on their long-term
objectives.”